Return on equity (ROE).
In plain English
Return on equity takes annual net income and divides it by average shareholders' equity. The result is the profit rate earned on the owners' stake. A high ROE can come from strong margins, fast asset turnover, or heavy borrowing, and those three sources are not equally durable. That is why analysts break ROE apart rather than reading the headline number alone. Companies that buy back stock shrink equity, which lifts ROE even when profit is flat.
01Why it matters
ROE is the closest single number to the question an owner actually cares about: how hard is the money already invested in this business working.
02The math, step by step
A company earns $120 million of net income on average shareholders' equity of $800 million. $120 million divided by $800 million is 15 percent. If it borrows to buy back stock and equity falls to $600 million on the same profit, ROE jumps to 20 percent with no improvement in the underlying business.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
Return on assets divides profit by everything the company controls, borrowed money included. ROE divides by the owners' slice only. Debt pushes the two apart: it can lift ROE sharply while leaving return on assets untouched.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
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